The entrepreneurial landscape is ripe with opportunity, especially for the many women with innovative and potentially game-changing business ideas. It can also be a productive path back into the working world after taking a hiatus to stay at home with children or care for an aging parent.
Yet launching a successful and sustainable business takes more than a promising vision and a healthy dose of passion. Indeed, the well-known fact that most small businesses don’t make it past the five-year mark due to cash flow problems underscores the importance of a sound financial plan.
The good news is there are steps you can take to prepare your personal and business finances for the inevitable ups and downs of entrepreneurship. As you develop your business plan, the following financial planning tips can help you successfully transform your dreams into reality.
Tip #1: Begin with the End in Mind
Our first financial planning tip for women who want to start a new business is to begin with the end in mind. In other words, what do you want your business to do for you?
For example, you may want your business to generate enough income to support your lifestyle goals. Or you may want to create an asset that you can eventually sell to fund your retirement. Regardless of your objectives, beginning with the end in mind can provide a helpful framework for making business decisions and managing your personal finances.
The CornerCap 3Rs framework can also be a valuable resource as you consider the financial planning aspects of starting a business. Put simply, entrepreneurs generally have three choices for allocating your business profits:
- Reward yourself with a paycheck.
- Reinvest in your business.
- Repurpose your assets into diversified outside investments.
Once you know what you want your business to do for you, you can prioritize these options accordingly, so you stay on track toward your long-term financial goals.
Tip #2: Understand Your Current Financial Situation
Before diving headfirst into entrepreneurship, it’s important to have a clear and thorough understanding of your current financial situation, including your income, savings, investments, debts, and potential sources of capital. This step is crucial for a variety of reasons.
First, starting a business often requires a significant upfront investment. Understanding your cashflow sources and uses can help you determine how much you can afford to invest in your new venture without jeopardizing your financial stability. It can also help you assess your ability to handle risk, since there’s no guarantee your business will be financially successful.
Moreover, lenders and investors will want to see a clear picture of your personal finances if you need to seek external financing. A strong personal financial history can make it easier to secure loans and attract investors.
Lastly, it’s often easier to chart a course toward your longer-term financial objectives when you know your starting point. Understanding your current financial status can help you plan for future goals while minimizing the financial risks inherent to starting a business.
Tip #3: Prepare for Unexpected Setbacks
As you pursue your entrepreneurial dreams, remember that setbacks aren’t just possible—they’re inevitable. Unfortunately, unexpected costs or a sudden drop in revenue can be devastating, especially in the early stages of a business.
Thus, it’s important to have a plan in place to protect your financial well-being in case you experience a major setback. In many cases, an emergency fund can provide the necessary cushion to keep your business operational and stabilize your personal finances through tough times.
A general rule of thumb is to keep enough cash on hand to cover at least six months to a year’s worth of expenses. If you don’t have the financial resources for this yet, you may want to give yourself some time to build a sufficient emergency fund before launching your business.
Tip #4: Have a System for Paying Taxes
Paying taxes can be a significant challenge for new business owners when it comes to financial planning. Not only can tax payments disrupt cash flow if you’re unprepared, but you may also face penalties and interest charges if you underpay or don’t pay on time.
To avoid costly missteps, it’s essential to have a system in place for managing and paying your taxes. Here are some tips to help you prepare for business ownership:
- Understand your tax obligations. Educating yourself about your specific tax obligations is a critical first step. Your business structure, location, and number of employees all influence the types of taxes you and/or your business must pay.
- Separate business and personal finances. This simplifies record-keeping and makes it easier to track taxable income and deductible expenses.
- Maintain good records. Keep accurate and detailed records of all your business transactions, including income, expenses, employee wages, and deductions. Good record-keeping will make it easier to calculate and file your taxes and is essential in case of an audit.
- Set aside money for taxes. Taxes are a non-negotiable expense you must factor into your budget. Be sure to set aside a portion of your income regularly to ensure you have sufficient funds when tax payments are due. As a business owner, myself, I have found helpful guidance and accountability by following a system called Profit First. If you’re interested in learning more or would like a copy of the book, let me know!
- Pay on time. Make sure you know when various taxes are due, as late payments can result in penalties and interest charges.
- Review your taxes regularly. Your tax obligations may change as your business grows and evolves. You should regularly review your tax strategy to ensure it remains appropriate for your current situation.
Finally, consider working with an expert who’s knowledgeable about current tax laws and can help you avoid potentially expensive mistakes. As a new business owner, the value of hiring a CPA or tax advisor to help you manage your taxes can far exceed the cost.
Tip #5: Weigh the Pros and Cons of Outside Financing
Securing outside financing can provide the necessary funds to launch or grow your business. But it can also lead to financial strain or loss of control. Thus, it’s important to carefully consider the pros and cons of obtaining outside capital as you embark on your entrepreneurial journey.
First, consider how much financing you need and the associated costs. If you apply for a business loan, make sure you can afford the payments even if your business struggles to perform.
It’s also important to weigh your financing options. While debt can be expensive, it also allows you to maintain control of your business. On the other hand, you don’t have to repay equity investors, but you do have to give up a portion of your business in exchange.
Lastly, consider alternatives like bootstrapping or crowdfunding. It can also be helpful to consult with a trusted advisor or mentor to ensure you’re considering your options from all angles.
Ultimately, the decision to rely on outside financing or fund your new venture with personal capital shouldn’t be taken lightly. The path you choose can have a significant impact on your success and personal fulfilment as a business owner.
Tip #6: Focus on What You Do Best
Finally, entrepreneurship often requires a willingness to wear many different hats, especially before you can afford to hire outside help. Yet as your business grows, you may be reluctant to give up control of certain tasks and responsibilities.
Trying to do everything yourself can be a mistake. While there are things no one else but you can do in your business, there are other jobs that only rob you of your time and energy.
For example, you may excel at customer service but struggle with basic bookkeeping. Or perhaps you’re spending too much time on social media when you should be focusing on overall business strategy.
It’s also possible you don’t want to manage your personal finances or make major business decisions on your own. Indeed, both can be overwhelming and keep you from executing on your vision.
Delegating responsibility to someone who’s skilled in these areas can help ensure you’re optimizing your resources and avoiding costly mistakes. When you have more time and energy to focus on what you do best, you’re also more likely to make decisions that support your goals and lead to long-term success.
If You’re Ready to Start Your New Business, CornerCap Can Help
Starting your own business can be an empowering and fulfilling journey. Yet to succeed, it’s important to make sound financial decisions along the way. With the right strategies and perhaps the help of a knowledgeable guide, you can create a solid foundation for successfully transforming your dreams into reality.
A wealth advisor like CornerCap can help you align your personal financial goals with your entrepreneurial ambitions. If you’re ready to pursue your new venture, schedule a call with us today to discuss how we can support your journey.